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March 27, 19U5Mr. Charles Mere, Editor,
The Hew York Times,
Hew York City.
Dear Charlie*
For your information, I am enclosing a copy of an explanatory statement that Mr. Eccles issued in connection with the
capital gains tax. Today's editorial in the Times, entitled
"Punishing the Thermometer", reiterates what he emphasized in this
statement under point 6, namely, that having failed to deal with
the causes, we have the alternative of trying to deal with the effects of this enormous inflation potential. You might note also
that the editorial appears to be in error in implying that Mr. Eccles
did not favor deducting capital losses, but his statement specifically
mentioned that point.
He has not undertaken at any time to say that prices of real
estate or securities were too high or too low, and he has stressed the
point that insofar as these values reflect underlying economic conditions and prospects, there can be no objection to their adjusting accordingly. He has, however, contended that, especially in wartime, the
speculative distortion of prices in these unprotected sectors of the
economy cannot be justified, and I should not imagine that the Times,
of all papers, would wish to do so.
The last two arguments in the
emanating from the brokerage community.
freeze capital holdings. The most that
is that there could be no runaway price
which would deter the speculative buyer
a quick turnover, rather than deter the

editorial are the familiar ones
First, that suoh a tax would
can be said for that contention
development with such a tax,
from purchasing with a view to

The second argument, that it would "stem the flow of money
into new ventures", is particularly superficial. In wartime, when
there are shortages of manpower and materials there is no occasion for
stimulating venture capital. To do so after the war is, of course, of
the highest importance. And, as the enclosed statement indicates, this
tax, like other control expedients, should be rescinded when inflationary
forces are no longer a serious threat to the economy. On this point,
Mr. Eccles wrote the other day to a Member of Congress, as followsi

Mr. Charles Mers


March 27, 19U5



In the postwar, however, what would really give encouragement to investments that result in production and employment would be
to put a tax premium on productive investment and a penalty on mere
speculation that furnishes neither production nor employment, but results only in economic instability. In order to induce venture capital to take risks in enterprise that furnishes production and employment, I would reduce the excess profits tax from the present 95 P©**
cent maximum to, say, 70 per cent, and make the normal corporation tax
25 per cent without the corporate surtax. I would then exempt from
the normal 25 per cent tax profits paid out in dividends, since they
would be taxed in the hands of the recipients. This would avoid the
double taxation that is a real deterrent to the investor in productive
enterprise. At the same time, I would grant an exemption of $25,000
to all corporations under the excess profits tax. This would not
matter so much so far as the large corporation is concerned, but it
would be a tremendous boon to the smaller and medium-sized concerns.
"With such positive inducement to real investment, the capital
gains tax would be insignificant and, in fact, there is much to be said
for retaining a capital gains tax that would penalise the speculator
looking for a quick turnover and hence further encourage the bona fide
investor seeking income or longer-range appreciation. The low capital
gains tax of the late 20 f s, far from encouraging venture capital to go
into new production, was a positive incentive far luring capital into
stock market speculation to make money the easy way."
The letter to the editor printed in the same issue is
equally mistaken about the 100 per cent margin. If it were put into
effect, it certainly would not be made retroactive, requiring liquidation to margin up outstanding accounts. Manifestly, the time to prevent an inflationary development is before it gets out of control, not
I would not bother you with all this, excepting that I think
it quite probable that something like this tax will be put up to the
Congress, perhaps in the form of the alternative suggestion to which
your editorial alludes; that is, to extend the holding period from the
present six months to, say, three years. Capital gains would then be
taxed under the progressive rates of the income tax. As you may have
occasion to recur to the subject later, I wanted you at least to know
the facts so far as Mr. Socles' position is concerned.
With kind regards,
Sincerely yours,



New York




Mr. Elliott Thurston
Board of Governors
Federal Reserve System
Washington 25, D.C.
Dear Mr, Thurston:
Your letter of a couple of weeks
ago came in when Mr. Merz was away on a vacation,
and I am sorry that through inadvertence I did not
personally acknowledge it until now*
I am not
sure that I agree with your arguments, but we will
be glad to bear them in mind*